1. The British Air Transport Association
(BATA) is the trade association of UK airlines representing both
scheduled, charter and freight operators. BATA members (see Appendix
1) produce about 95 per cent of UK airline output.

2. The Sub-Committee has requested evidence
on the economic and political implications of the downturn in
passenger numbers, security, the role of international subsidies
and the proposals for Government assistance for the industry,
and the effect of the rules of ownership on the United Kingdom
air transport industry, consequent on the incidents of 11 September
2001.

IMPACTS

3. The events of 11 September 2001 have
precipitated a major crisis in the aviation industry. Before 11
September the international aviation industry was preparing for
a global economic slowdown and some airlines were already having
to deal with a looming financial crisis. In the UK airlines were
financially healthy. Some sectors were growing strongly whilst
others maintained a slightly reduced capacity in advance of an
expected decline in business travel. The airspace closures triggered
by the events on the 11 September effectively closed down significant
parts of the UK airline business for a number of days.

4. This business closure cost UK airlines
about £100 million and stranded thousands of passengers on
either side of the Atlantic.

5. Higher levels of security were implemented
immediately (details in Appendix 2). The estimated cost of these
new measures for UK airlines is £100 million per annum.

6. Within a week the market for competitive
aviation insurance cover effectively disappeared. The withdrawal
of third party cover almost grounded the whole industry. Only
Government assistance as insurer of last resort allowed the airlines
to maintain services. The estimated additional cost of insurance
for UK airlines is $250 million per annum. Details of the changes
to airlines insurance cover and premiums are shown in Appendix
3.

7. Following the reopening of airspace and
repatriation of stranded passengers, airline operators to North
America and some other international routes suffered a massive
drop in demand. Airlines took immediate action to reduce capacity
but demand remains significantly depressed (over 30 per cent)
in several key markets.

8. In Europe the drop in passenger numbers
was more limited (circa 10 per cent) with demand for business
travel being most affected.

9. The impact of this depressed market has
been felt immediately by scheduled airlines, particularly those
with significant operations to North America and some other longhaul
destinations.

10. This crisis has tipped those airlines
with pre-existing financial problems into various forms of bankruptcy,
part or full closure. Those scheduled airlines with most exposure
to North Atlantic routes have been affected most, but action taken
by both British Airways and Virgin Atlantic has ensured that they
are well placed to take advantage of any market recovery. The
impact on the tour operating/charter airline sector is likely
to be felt a little later. Most passengers, having booked and
paid for their holidays, are still travelling but new bookings
have dropped away dramatically especially to North America and
other longhaul destinations.

AIRLINES RESPONSE

11. UK airlines reacted quickly to this
sudden downturn in demand by cutting capacity and costs. So far,
over 10,000 jobs have been lost, and over 50 aircraft have been
grounded.

12. Promotional activity has been used to
stimulate air travel initially in those markets least affected
by the events of 11 September and more recently in a wider range
of markets. However, with a continuing climate of war and crisis
the targeting and timing of such activity is crucial. Regaining
the full confidence of travellers in the most nervous markets
will require a successful conclusion to the crisis, confidence
building from the industry and governmentsand time.

WIDER ECONOMY

13. There has been a fairly rapid cascade
effect in sectors related to aviation. Jobs have been lost in
Aerospace Manufacturing and a variety of companies that support
the airlines.

14. Perhaps the greatest single impact has
been on Inbound Tourism where the sudden drop in visitor numbers,
especially from the USA and Japan, has hit an important sector
already suffering from the Foot and Mouth crisis earlier in the
year.

15. The current crisis has displayed, in
fairly stark relief, the economic importance of the aviation industry
in the UK. Even more important it could be demonstrating that
a lack of confidence in aviation, especially a perceived lack
of freedom to travel by businesses, can have a seriously damaging
impact on international trade and hence the UK economy as a whole.

THE ROLEOF GOVERNMENT

16. The nature of the atrocities of 11 September
meant that the priority for Governments was to ensure aviation
security. The airlines and airports responded quickly to the additional
security requirements in the UK and we support efforts by the
UK Government to ensure a high level of security, consistently
implemented across Europe and worldwide.

17. UK airlines believe the current crisis
does not justify state-aided rescue of airlines that were already
in financial difficulties before 11 September. Higher costs and
a sudden drop in demand has created a financial crisis across
the industry but our primary request of Government in this even
more competitive market is to ensure that UK airlines are not
disadvantaged.

18. The United States Government reacted
swiftly to the crisis and the US airlines have been offered an
$18.5 billion package of aid:

 $5 billion of direct aid (cash) for
immediate impact and continuing loss of business up to

31 December 2001.

 $10 billion of Loans and Loan Guarantees.

 $3.5 billion of investment in security
at airports and on aircraft.

In addition the US Government took responsibility
for any third party liability over $100 million caused by "an
act of terrorism" during the next 180 days. Also, US carriers
have been granted a three month deferment of tax payments to Federal
authorities.

19. The European Transport council meeting
on 16 October 2001 concluded that States may offer support to
airlines in a number of areas including:

 Underwriting of Third Party Insurance
risk.

 Additional Security costs; and

 Compensation for losses due to the
consequences of airspace closure.

This is a very modest package of measures in
comparison to that available to US airlines and we are particularly
concerned about distortion of competition on routes where US and
UK airlines compete.

However, if implemented consistently, we believe
that these measures will provide the minimum necessary support
and ensure that State Aid is not used to distort competition within
Europe.

20. We have formally requested this support
from Government. We have also requested that, as they have been
hit by sudden increases in security and insurance costs, airlines
should be allowed to delay payments to Government (for example
payments of APD) during the next few months. We await a response
to this request and continue to hope that Government will act
positively to ensure that the UK's aviation industry is not left
at a competitive disadvantage at this critical time.

21. INSURANCE

The current failure of the Aviation Insurance
market came close to halting the airline industry at the end of
September. We welcomed the Government's decision to underwrite
the gap in insurance cover which allowed us to maintain our services
and we welcome the European decision to extend the period of cover
until the end of December this year. However, it is becoming clear
that there will be no early return to a robust and competitive
insurance market covering aviation war/terrorism risks and we
will be seeking to extend the current arrangements for what is
likely to be a prolonged period. The airlines are also considering
possible long-term alternatives to commercial insurance in this
area.

22. RULESOF
OWNERSHIP

The crisis has served to focus attention on
the national and international restrictions that constrain the
development of the industry. The Chicago Convention of 1944 established
the basis for a system of bilateral agreements between countries
governing air services between those countries.

At the heart of this system is government "designation"
of air carriers. Before a government will designate a carrier
for international (and in most cases domestic) service, it will
usually want to be satisfied that the carrier is substantially
owned and controlled by nationals of the country (usually interpreted
to mean that nationals must have 51 per cent or more of voting
shares in a carrier). This provision was intended to prevent foreign
ownership of what were then considered strategic assets, and to
reserve the benefits of traffic rights between two countries principally
for carriers of those countries. Similarly, the government of
the country at the opposite end of a route can generally refuse
to accept designation of a carrier which is not owned and controlled
by nationals of the designating country.

These provisions remain in place in most jurisdictions.
However, there are some exceptions. Within the European common
aviation area, carriers do not have to be designated by national
governmentsthough they must have an Air Operator's Certificate
(AOC) issued by an EEA government and must not be controlled or
owned by non-EEA nationals. The practical effect of this is that
nationals of any EEA state can provide air services to, from or
within another member state of the aviation area. This has allowed,
for instance, German tour operators to own UK charter carriers,
or UK citizens to control a Belgian carrier.

There are thus no barriers to consolidation
of ownership of carriers operating entirely within the EEA. But
it would still be possible for a third country to refuse to accept
the designation of a carrier attempting to operate from one EEA
member state to the third country while being substantially owned
and controlled by nationals of another EEA state. So, the US could
object to Italy attempting to designate a French-owned carrier
for services from Rome to New York.

Similarly, it remains impossible in most countries
outside the EEA for non-nationals of that country to own and control
an airline operating domestic air services. The evidence from
Australia, where foreign ownership and control of domestic airlines
has been allowed, shows the consumer benefits which can result
from the removal of these archaic rules.

The current ownership and control rules militate
against normalisation of the airline industry since cross-border
mergers, which are usual in other industries from car manufacture
to telecoms, are greatly discouraged. BATA believes that liberalisation
of ownership and control rules could provide an important boost
to industry consolidation and efficiency, allowing weaker carriers
to be taken over by stronger carriers (which should be better
at generating and sustaining wealth and jobs) from outside the
country of designation. This is more important than ever as the
aftermath of 11 September exposes fundamental fault lines in the
business models and efficiency of some carriers, although any
mergers must be subject to the application of competition law,
as in any other industry.

The Government has championed this issue. We
expect it to continue to negotiate with other countries to include
reciprocal liberalisation of ownership and control rules and that
designation should be based on carriers with their principal place
of business and AOC in the country of designation. The detailed
steps and the order in which they are taken are a matter for Government
but we would expect the interests of the UK's valuable, competitive
and highly successful airline industry to be a prime consideration.

23. REGULATORY
BURDEN

Airlines accept that they operate in a highly
regulated industry and that Safety and Security regulations are
even more important following 11 September. However, there are
a number of developments in the UK and within Europe, outside
the fields of Safety and Security, which could result in significant
new burdens on aviation. One example of this is the proposed change
to airport economic regulation in the UK recently announced by
CAA. The proposed move away from the "single till" approach
would inevitably increase airline costs which would in turn have
to be passed on to the consumer in the form of higher fares.

We do not believe it is appropriate, at a time
when EU states are considering how they might best support their
aviation industry, for the EU, individual Member States or Regulators
to be considering how to add further economic burdens on air travel.

. CONFIDENCE
BUILDING

The airlines expect a return to previous levels
of demand and a continuation of the natural growth in air transport.
The timing of this will remain unclear until world events have
stabilised, but there is no reason to believe that the current
crisis will have any significant effect on the previous long-term
trends. Therefore, we believe it is very important for Government
to press ahead with its plans to produce a 30-year framework for
UK air transport in a White Paper during 2002. This would not
only meet the primary objective of a timely decision making framework
for an industry with long lead times but would also be a vote
of confidence in the UK's highly valued and hugely successful
air transport industry.

British Air Transport Association

20 November 2001

APPENDIX 1

BATA MEMBERSHIP

Air 2000

Airtours International

Britannia Airways

British Airways

British European

bmi British Midland

Channel Express

Heavylift Cargo Airlines

JMC Airlines

KLM uk

Monarch Airlines

Royal Aeronautical Society*

(Incorporating The Society of Licensed Aircraft
Engineers and Technologists)

Society of British Aerospace Companies*

Virgin Atlantic Airways

* Associate Members

APPENDIX 2

AVIATION SECURITYFOLLOWING 11 SEPTEMBER

The following new security requirements were
imposed on airlines:

 All catering and aircraft stores
to be searched before being taken on board.

 All vehicles conveying passengers
to aircraft to be searched.

 All aircraft not in service to be
searched internally and externally before being taken into a Restricted
Zone (ie airside) and guarded until it reaches the Zone.

 Further internal and external search
close to boarding.

 All aircraft operating to the US
and Canada shall be guarded from the start of the search until
takeoff. All service personnel accessing the aircraft to be searched.

 All other aircraft to be placed under
continuous surveillance while airside and visited by a patrol
every 15 minutes.

Further requirements in relation to terminal
and baggage searches have also been imposed on airports.

The new measures included controlling carriage
of sharp implements on board the aircraft. Check-In processes
now include making passengers aware of these new regulations.

Of all the impacts since 11 September, the cost
of the new Security measures is the most difficult to estimate.
The requirements are delivered by both airlines and airports in
the UK and costs have yet to be finalised. At airports overseas
the position is further complicated by differences in measures
being undertaken, additional measures being planned and the various
approaches to the cost of aviation security.

APPENDIX 3

AVIATION INSURANCE
FOLLOWING 11 SEPTEMBER

The following changes were imposed on airlines
on 24 September 2001.

 A surcharge of $1.25/passenger/journey
was immediately imposed to reinstate existing policies with substantially
reduced third party war and terrorism liability cover of $50 million
compared with previous levels of well over $1 billion.

 Aggregate cover limits were imposed
in place of "each and every incident" limits.

 Hull war insurance underwriters imposed
a premium surcharge of 0.05 per cent of fleet value.

 Insurers demanded payment of all
surcharge premiums in advance by as much as 12 months.

 Insurers imposed the right of re-price
as often as they wish at only seven days notice if the total premium
does not meet anticipated levels.

 Insurers are unable to guarantee
continuation of cover following any future terrorism event.

In addition just two insurers offered a "top-up"
third party war and terrorism liability cover at an additional
surcharge of $1.85/passenger/journey. These terms were effectively
non-negotiable. The two underwriters offering the "top-up"
policy share ownership with the two largest aircraft lessors who,
in turn, were insisting that airlines procure the insurance on
offer.

The market for competitive insurance cover has
effectively disappeared.

The premium to be paid for Government cover
above $50 million is still being discussed. The annualised cost
estimate in paragraph six is based on the assumption that this
will be the equivalent of approximately $1/passenger/journey.

1. This submission has been produced by
the Charter Group, which represents all the UK's major charter
airlines. Its members, Airtours International, Air 2000, Britannia
Airways, JMC Airlines and Monarch Airlines collectively carried
just over 27 million passengers last year (CAA airline data statistics
2000), representing 60 per cent of all passengers travelling abroad
by air. They collectively operate over 170 aircraft and employ
13,174 staff. Airtours, Air 2000, Britannia and JMC are subsidiaries
of inclusive tour groups.

Scope and summary of submission

2. The Sub-Committee has requested evidence
on the economic and political implications of the downturn in
passenger numbers, security, the role of international subsidies
and the proposals for Government assistance for the industry,
and the effect of the rules of ownership on the United Kingdom
air transport industry, consequent on the incidents of 11 September
2001.

3. The UK charter sector has experienced
a reduction in demand similar to that in the scheduled sector
and consumer confidence has not noticeably recovered since 11
September. However, the pattern of that reduction is distinctive.

4. The impact will affect not only carriers
but also the entire supply chain, which covers almost 520,000
jobs.

5. Although the logistical complexity of
strengthened security requirements can be accommodated, they impose
significant additional costs which, when added to considerable
increases in insurance premiums, threaten the stability of the
charter sector.

6. We accept that State subsidy by way of
compensation for force majeure is not in itself justifiable. However,
it would be equitable and, from Treasury's point of view, economically
desirable for the State to seek to alleviate the consequences
of market failure (insurance) and the financial impact of Government-imposed
requirements (closure of airspace; security). Current levels of
support are unlikely materially to mitigate those consequences.

7. While accepting that the events of 11
September have added to the financial problems that were already
being experienced by a number of airlines, subsidies or a relaxation
in competition or slot allocation rules which would distort the
market and are unnecessary.

Impact of 11 Septembercomparison between
charter and scheduled operations

8. As a preface to the impact data that
follows, the Sub-Committee should be aware that:

 The UK charter sector was healthy
prior to 11 September, with average passenger loadings in excess
of 93 per cent (compared to 73 per cent for a typical scheduled
carrier) and strong demand growth.

 The sector is the most price-competitive
in Europe. It has certainly not lost volume through offering poor
value: even "no frills" scheduled airlines are often
unable to match UK charter carriers' fare component in holiday
packages.

 The charter sector is in direct competition
with scheduled leisure services. They are not separate sub-markets
and differ only in their mode of operation, with charter airlines
selling the bulk of their seats to tour operators rather than
direct to the public.

 All charter passengers are covered
by carriers' Bond. Charter airlines would therefore have been
obliged to cover the cost of repatriation and associated welfare
throughout the delays overseas which ensued from 11 September.

9. The immediate consequences of 11 September
were a sharp drop in bookings for the winter 2001-02 and Summer
2002 seasons, which have averaged 15 per cent and 45 per cent
respectively below last year's level.

10. This has in turn precipitated 7,100
job losses in the inclusive tour sector, including 720 within
charter airlines and a freeze on recruitment amounting to several
hundred more. Orders for 11 aircraft have been shelved and 16
aircraft in the current fleet have been mothballed. These and
other cost reductions have had impacts throughout the supply chain,
with at least one major supplier having announced a significant
reduction in its airport operations.

11. The assessed impact on UK charter carriers
of the four day closure of airspace (US and Israeli) following
11 September was over £10 million in lost revenue and consequential
costs. Because a feature of charter operations is that delayed
flights are not cancelled (in contrast to scheduled services),
some carriers were still repatriating stranded passengers on 21
September.

12. The market for competitive insurance
cover has effectively disappeared.

 A surcharge of $1.25/passenger/journey
was immediately imposed to reinstate existing policies with substantially
reduced third party war and terrorism liability cover of $50 million
compared with previous levels of well over $1 billion.

 Proposed "top-up" third
party war and terrorism liability cover was priced as an additional
surcharge of $1.85/passenger/journey.

 Aggregate cover limits were imposed
in place of "each and every incident" limits.

 Hull war insurance underwriters imposed
a premium surcharge of 0.05 per cent of fleet value.

 Insurers demanded payment of all
surcharge premiums in advance by as much as 12 months.

 Insurers imposed the right to re-price
as often as they wish at only seven days notice if the total premium
does not meet anticipated levels.

13. These terms were effectively non-negotiable
since only two insurers were willing to provide cover and there
was no competition between them. Furthermore, the underwriters
offering the "top-up" policy share ownership with the
two largest aircraft lessors, who are themselves able to demand
that the "top-up" insurance is procured. It should be
noted that the imposition of a per passenger surcharge has a greater
impact on charter services because of their much higher passenger
loading.

14. The following new security requirements
were imposed on airlines:

 All catering and aircraft stores
to be searched before being taken on board.

 All vehicles conveying passengers
to aircraft to be searched.

 All aircraft not in service to be
searched internally and externally before being taken into a Restricted
Zone (ie airside) and guarded until it reaches the Zone.

 Further internal and external search
close to boarding.

 All aircraft operating to the US
and Canada shall be guarded from the start of the search until
takeoff. All service personnel accessing the aircraft to be searched.

 All other aircraft to be placed under
continuous surveillance while airside and visited by a patrol
every 15 minutes.

While these are logistically feasible, the compliance
cost has averaged £1.33 per passenger. Further requirements
in relation to terminal and baggage searches have also been imposed
on airports, and it is assumed that those costs will be added
to airport charges, possibly increasing the total to £1.78.
Taking security and insurance together, we estimate the total
additional cost per passenger will be £4.77 in a sector where
the elasticity of demand is around 1.5.

15. The charter and scheduled sectors differ
in the extent to which these impacts will last. While there is
considerable uncertainty over the duration and outcome of the
current conflict, we would expect that confidence in air travel
will return from late-Spring 2002. However, while this should
be reflected in an immediate increase in scheduled demand, charter
volumes will recover much more slowly, since tour operators expect
to sell holidays many months ahead (as an example, they would
normally expect bookings to have filled 40 per cent of Summer
2002 capacity by now) and demand up to a year ahead will have
been influenced by concerns created in the immediate aftermath
of 11 September. Significantly, in respect of 10. above, consumer
confidence has barely recovered in the two months since 11 September:
bookings over the past two weeks are an average of 32 per cent
down on the same period in 2000.

16. The aviation and outbound tour operating
industry directly employ around 223,000 full time equivalents
in the UK, with another 294,000 indirect or induced jobs depending
on it. (Source: Oxford Economic Forecasting 1999 and tour operator
information). This is a supply chain of the scale of Rover's and
probably affecting more constituencies. Almost every link in that
chain is under pressure and the survival of many SME suppliers
is in question. It is inevitable under such circumstances that
consideration has been given to seeking the temporary reintroduction
of passenger surcharges, which are currently banned under the
1992 Package Travel Regulations. The submission of the Federation
of Tour Operators covers this point in greater detail.

17. BAA data has indicated that the impact
of the Gulf War was greater than that of 11 September. However,
three qualifications should be made to conclusions drawn from
BAA monthly statistics:

 they cover passenger throughput and
do not reflect the significant downturn in bookings for future
fights;

 currrent impacts arise not only from
the "war against terrorism" but directly from concerns
following aviation-related disasters; and

 in the Gulf War, the greatest impact
on UK carriers was on demand for inbound flights from the US.
In the present case, UK passenger confidence has collapsed and
the impact is being felt in demand for flights to almost every
destination.

The role of Government

18. To date, the UK Government has restricted
its assistance to the establishment of short-term insurer of last
resort following the cancellation of airlines' war liability insurance
cover. On 21 September a 30 day Government-supported scheme, Global
Aerospace, was instituted and on 22 November is was extended until
22 January 2002. From 8 November airlines have been required to
find commercial cover for the first $50 million of war and terrorism
liabilities and Government will provide cover above that level
at tiered rates in accordance with European Commission guidelines.
While we are grateful to Treasury for seeking to encourage a return
by the insurance market to normal conditions, as para 14 above
shows, even taking account of Government support the cost of UK
cover has typically increased seven-fold and we are sceptical
that those conditions can be re-established for some time to come.

19. We should stress that we do not believe
that the payment by Government of compensation for force majeure
is in itself justifiable and we do not support Government subsidy
in respect of reductions in bookings. However, the enormous change
in the structure of the insurance market, the significant rise
in security costs and the impact of the closure of US airspace
resulted, wholly or in substantial part, from the response by
governments to the 11 September incidents. Under such circumstances,
we would submit that it would be equitable for the UK Government
to provide limited support as follows:

 broadening its current insurance
scheme to offer lower premiums in the light of the lack of private
sector competition;

 following the US in agreeing to guarantee
the scheme for a further 120 days (ie matching the US 180 day
support horizon);

 allowing an offset against Air Passenger
Duty for higher security and insurance costs; or at worst, deferment
of APD payments until September 2002; and

 compensation for direct and consequential
loss arising from the closure of US airspace.

20. Such support also makes economic sense
for the Treasury, since it would serve to arrest the loss of Income
and Corporation Tax, National Insurance and multiplier expenditure
throughout the supply chain that will result from further retirement
of aircraft, reduction in supply requirements and associated job
losses as well as staving off an increase in unemployment benefit.

21. Any support package must be even-handed
as between scheduled and charter modes. We therefore believe that
Government should not support any relaxation of EU competition
rules in order to permit consolidation of carriers who may not
have been operating efficiently prior to 11 September. The creation
of a limited number of "super carriers" would risk the
establishment of dominant bargaining power in slot allocation,
scheduling and in access to airport facilities and would offer
no apparent benefits to consumers, who still pay too much for
many scheduled routes. If, force majeure aside, airlines cannot
operate profitably there is no reason why their place should not
be taken by others under a true Open Skies regime.

1. The terrorist attacks on New York and
Washington on 11 September have already had a profound effect
on the air transport industry both in the UK and elsewhere. The
use of aircraft as weapons, and the willingness of hijackers to
sacrifice their own lives, have reshaped the background against
which Governments and operators worldwide must seek to protect
the security of aviation services. The immediate priority has
been to ensure as far as possible that there can be no further
attack similar in type or scale to those of 11 September. At the
same time, a steep decline in consumer demand for air travel,
combined with additional costs for security and insurance, have
had immediate economic consequences for most airlines, and to
a lesser extent for other parts of the air transport industry.
In the short term the industry, which was already facing difficult
financial circumstances before 11 September, must adapt to a radically
altered commercial environment, and financial prospects for the
medium and longer term remain uncertain.

2. The Committee will appreciate that events
are moving swiftly, and are likely to continue doing so. Statements
and references in this memorandum are up to date at the time of
submission.

Downturn in Demand

3. Major uncertainties about the impact
of the events of 11 September on air traffic include:

 the scale and duration of the short-term
fall in traffic;

 the scale and time profile of the
subsequent rebound in traffic;

 whether, and if so, how soon traffic
returns to its long-term trend;

 the shape and strength of the UK
air transport industry when the market has "settled down".

4. The closest previous analogy is the experience
of the Gulf War at the beginning of the 1990s. The impact of the
Gulf War, coupled with the onset of global recession, saw passengers
carried by UK airlines falling by 6.2 per cent in 1991. However,
this was a short-lived phenomenon, with traffic rising by 16.2
per cent in 1992. Although it is too early to tell how reliable
a guide this will provide, it seems likely that this time the
current decline in passengers carried will be deeper and longer
lasting.

5. As with the Gulf War, the impact of the
events of 11 September are hard to disentangle from wider economic
influences. Before 11 September the industry was already encountering
financial problems as a result of higher fuel prices and the economic
downturn, resulting in excess capacity. Spot jet fuel prices increased
by two-thirds in 2000 although they peaked by late 2000 and in
August 2001 were 25 per cent less than in August 2000. Most major
European airlines reported modest profits or losses in 2000 (although
BA made a small operating profit in the financial year 1999-2000,
its results were its worst since 1982), and US airline profits
were well down. This year BA had seen sharp falls in North Atlantic
and Far East traffic of 15-20 per cent in the months April-August
2001, only partly attributable to the foot and mouth outbreak.

6. This time round the initial impact appears
to be significantly larger than during the Gulf War. IATA have
forecast that worldwide passenger numbers between September and
December will be 15-20 per cent down, with a 6-7 per cent drop
in traffic in 2001 over 2,000. One source (Airline Strategy) is
projecting falls in intra-European traffic and European international
traffic of 15 per cent and 30 per cent respectively over the next
year, with a recovery starting in late 2002 and strengthening
in 2003. Even once traffic recovers to its previous long-term
trend, the experience of the Gulf War suggests that it will take
several years more before airlines regain satisfactory profitability.

7. The impact of 11 September will not be
uniform across all UK carriers. Those airlines with long haul
operations, particularly those with transatlantic services, will
be most exposed while the indications are that airlines who operate
domestic and European services will be better placed. This is
illustrated by the most recent figures prepared by the Association
of European Airlines (AEA), which show that in the five weeks
since mid-September, North Atlantic traffic was down by about
a third, Far East traffic by about 15 per cent, and intra-European
traffic by about 10 per cent. There is also evidence that premium
class traffic was more significantly affected than economy class
in the immediate aftermath, with the volume of business-related
travel sharply down on certain routes since 11 September.

8. By contrast, the UK's no-frills carriers
such as easyJet and Go (and the Irish carrier Ryanair) report
great confidence about their prospects, indicating that for their
services any dip in demand following 11 September was short lived
and that the market for their services is proving responsive to
price cutting. All have exhibited strong growth in passengers
and profits in recent years, and, without an exposure to transatlantic
services, have not suffered significantly from the events of 11
September and see additional opportunities from reductions in
the size of "full-fare" carriers. For example, easyJet
reported that its passengers were just 3 per cent down in September
compared with August, that its full year profits would be in line
with expectations, and that bookings were back to normal in October.
Go recently reported six month profits up by over 50 per cent
on the previous year's corresponding figures, with passengers
up by over 40 per cent, and plans to increase its fleet by at
least seven aircraft in the next 12 months.

9. BA have reported that in the week of
11 September when US airspace was closed, operating results were
adversely affected by some £40 million. Passenger numbers
were down by 11.6 per cent in September and by 14.6 per cent in
October 2001 compared with the same months in 2000. The overall
monthly passenger load factor was 7.3 points down in September
and 8.1 points down in October. BA's statistics confirm that the
largest reductions in passengers were across the Atlantic which
were 30 per cent down compared with 2000. Domestic and European
passengers were less than 10 per cent down. Forward bookings for
October and November indicate that traffic will be down by 25-30
per cent compared with last year, with capacity down by at least
15 per cent. On 6 November BA announced that it had raised a new
£700 million loan facility in the commercial markets. This,
together with other resources, would ensure it has the necessary
liquidity to ride out the current adverse trading conditions.

10. With revenues significantly reduced,
a number of airlines have cut schedules and cut their workforces.
Soon after 11 September BA announced reductions in capacity for
the coming winter season of around 9 per cent, additional to earlier
plans of cuts of around 8 per cent. The three largest UK scheduled
carriers (BA, Virgin Atlantic and bmi British Midland) have between
them announced job losses of around 9,000 since 11 September.
Gill Airways, a regional operator flying out of Newcastle Airport,
has gone out of business with the loss of 240 jobs, and there
have also been substantial job losses in the tour operator/charter
airline sector. In the US the major carriers are reported to have
shed some 80,000 jobs since the terrorist attacks.

11. Airlines in Europe are facing similar
problems, and taking similar steps in terms of cutting jobs and
services. Particularly noteworthy have been the recent collapses
of Swissair and Sabena. In both cases the effects of the terrorist
attacks were the final blow, striking at airlines which were already
severely weakened pre-11 September, Swissair by its unsuccessful
policy of purchasing minority shareholdings in a diverse range
of European airlines, and Sabena by cumulative losses over many
years (and latterly the withdrawal of Swissair funding).

12. Airports are also suffering from a combination
of lower revenues and the cost of additional security measures
(even though, in some cases, fewer flights can mean a reduction
in airport security costs). Airlines typically pay charges to
the airport per passenger and per aircraft. Income from passenger
charges is already down with the fall in traffic, and income from
aircraft charges is expected to decline as airlines respond to
lower passenger numbers by reducing capacity. Airports will also
face reductions in their commercial revenues, such as retailing
and car parking. Higher costs will be incurred from the additional
security requirements, and, in some cases, increased costs of
policing. BAA has stated that passenger traffic levels at its
airports, which account for some two thirds of all passenger numbers
at UK airports, were 12 per cent down in October compared to the
previous year. Within this, passengers in October decreased at
Heathrow (¸20 per cent) and Gatwick (¸13 per cent) but
rose at Stansted (7 per cent), Edinburgh (13 per cent) and Glasgow
(7 per cent), reflecting the growth of the scheduled low-cost
carriers. However, it is clear that the UK airport sector in general
is not in such commercial difficulty as are some parts of the
airline sector.

13. NATS charges airlines for the provision
of air traffic services by volume of traffic. Its revenues are
consequently at risk following the downturn in demand for air
travel, and the company is in the process of reviewing its financial
position. It is working on the production of a business plan for
submission to DTLR, as it is required to do under the PPP deal.

14. In the course of this review NATS has
examined the phasing of its capital investment plan. As a result,
the Government has agreed to a proposal from NATS to delay construction
of the New Scottish Centre at Prestwick, which was due to open
by 2007-08. Preparatory work on the building and system design
will, however, continue, in order to ensure that delay to the
opening of the Centre is kept to a minimum. It is not possible
to be precise about the revised timing, because future traffic
levels are still not clear. The capacity of the existing Scottish
Centre will be sufficient to meet traffic demand in the meantime.

15. In addition to the direct job losses
announced by UK airlines, there are likely to be further effects
on employment in aviation-related activities. A study by Oxford
Economic Forecasting ("The Contribution of the Aviation Industry
to the UK Economy"), published in November 1999, calculated
that taking into account of various other routes by which the
aviation industry helps to support jobs in the UK economy, the
number of jobs supported was around three times the size of those
directly employed in the industry (550,000 jobs in the UK compared
with 180,000 direct employees). This does not include the 100,000
people employed in the UK aerospace industry.

16. The scale of any wider economic impacts,
for example on the UK tourism industry, will depend on the duration
of the fall in traffic, and in particular whether it extends into
summer of 2002. It is evident that many travel agents and tour
operators are facing difficult trading conditions as some holidaymakers
hesitate to make bookings. The Government is conscious that this
could increase calls on the Air Travel Trust Fund (ATTF), the
back-up mechanism which stands behind the Air Transport Organisers
Licence (ATOL) arrangements in the event of an ATOL holder defaulting
and the ATOL bond being insufficient to refund and/or repatriate
customers. Since the Fund is currently financed by a commercial
overdraft backed by Government guarantee, any such calls would
impact on public finances.

17. The implications of 11 September for
regional services, ie services to London from regional airports,
are as yet unclear. Already, before 11 September, there were concerns
that UK airlines would withdraw or reduce domestic services so
as to use the slots so released for more profitable long-haul
services. Such concerns have no doubt been increased by BA's withdrawal
of its Belfast International-Heathrow service from 27 October.
However, bmi British Midland saw this as a commercial opportunity
and reinstated four daily services on this route, so that there
are still 31 services today from Belfast to London. One consequence
of 11 September events is that the pressure on slots at Gatwick
at least may be somewhat reduced for a time.

18. As slot allocation is not generally
route specific, airlines are free to use the allocated slots as
they wish. It is not Government policy to get involved with the
commercial decisions of airlines. However, we are reviewing our
policy on regional services and considering a number of policy
options which might help provide greater assurance of the continuation
of services from regional airports to London.

Security

19. In the UK, DTLR is responsible for regulating
the transport industries in respect of security measures. DTLR
has developed and administers the UK National Aviation Security
Programme (NASP), which is a comprehensive set of measures designed
to safeguard civil aviation in the UK, and UK airlines overseas,
against acts of unlawful interference such as hijacking or sabotage.
The Programme is threat-based, with measures stepped for Low,
Moderate, Significant and High threat levels. The Programme is
kept under constant review and the measures it contains are adjusted
to take account of changes in the perceived threat to civil aviation
in the UK and overseas. The attacks on 11 September clearly have
enormous implications for the NASP, both in terms of the outcome
of the hi-jack, and in terms of how the hi-jack was carried outwith
minimal reliance on weapons.

20. Since 11 September, the threat to security
at all UK airports and on all flights operating from the UK has
been treated as "Significant". A package of Heightened
Security Measures has been issued by legal direction to aerodrome
managers, airlines, approved caterers and regulated air cargo
agents. In particular, much stricter controls have been agreed
with the US Federal Aviation Administration (FAA) and imposed
on flights to the US and Canada.

21. UK baseline measures (for "Low"
and "Moderate" threat) remain in place. The key requirement
is for the aerodrome manager to provide a secure restricted zone
for civil aviation operations. Access to this zone must be controlled
by a pass system and all passengers and their hand baggage, staff
and vehicles must be screened and/or be searched upon entry. All
international cargo is subject clearance, and all hold baggage
must be screened on international flights.

22. The following Heightened Security Measure
supplement the baseline measures:

 random searching of hold baggage
for flights to the USA or Canada prior to, or immediately after,
check-in;

 more searching by hand of passengers
and their cabin baggage upon entry to the RZ, plus a regime of
secondary searching at the departure gate for flights to the US
and Canada and in terminals where arriving and departing passengers
are not physically segregated;

 an expanded list of articles which,
as potential weapons, cannot be taken into the RZ or the aircraft
cabin;

 screening or searching of goods for
retail upon entry to the RZ;

 guards within the RZ for aircraft
departing to the USA or Canada;

 additional mobile patrols within
the RZ; and

 tighter rules on the transportation
of cargo, especially when going to the US and Canada.

23. For the longer term, the Government
has established two working groups under DTLR chairmanship, including
industry representation, to consider additional security measures
that could be applied to aviation in recognition of the new type
of threat. Proposals from the groups include both pre-flight and
in-flight measures. Pre-flight measures are designed to prevent
an attacker getting on board an aircraft in the first place. In-flight
measures are designed to offer the best protection should a hijacker
succeed in boarding an aircraft, so that crew are given the support
they need. All these possible measures will need to be assessed
in terms of their cost, safety implication and potential benefits.
Some of the measures, even if agreed, would take time to implement.
Others could be implemented fairly quickly.

24. New measures being assessed for pre-flight
security are:

 Systems to check passenger details
against police and immigration suspects lists, and the validity
of passports;

 Acceleration of work on passenger
imaging including metal and explosive detection technology; and

 Extended background checks on airport
employees.

25. The measures being assessed for in-flight
security in consultation with the Safety Regulation Group (SRG)
of the CAA are:

 Revised flight crew security training;

 Controlled access to the cockpit.
A 12-point requirement, balancing safety and security needs, was
issued by the CAA to UK airlines on 18 September, supplemented
on 18 October by guidance on procedures for strengthening cockpit
doors;

 Sky Marshals, or training to develop
a core capability on high-risk flights;

 Extension of datalink technology
to warn of flight deviations;

 A more robust alarm warning system
by means of transponder;

 Remote or automated control and recovery
of hijacked aircraft;

 Enhanced security regime for flying
schools and general aviation; and

27. On the wider international front, at
recent meetings of the EU Transport Council British Ministers
have supported proposals to make effective and uniform standards
of aviation security legally enforceable. The common rules will
be based on those of the European Civil Aviation Conference (ECAC),
which are in turn being reviewed in the light of 11 September
with input from DTLR officials. Multinational inspection teams
will monitor the new system. The Commission and ECAC are also
examining options for in-flight security enhancements. A similar
review of international security measures backed by quality control
systems is being pursued by the International Civil Aviation Organisation
(ICAO). DTLR and CAA officials are closely involved in all this
international work in order to ensure there is consistency between
national and international standards; that the UK is able to apply
security that is appropriate to the threat; and that UK industry
is not disadvantaged compared to our competitors.

Government Intervention

28. The adverse commercial impact of the
events of 11 September has prompted requests by airlines, both
in the UK and elsewhere, for government support. In the EU any
assistance to airlines must comply with the state aid rules in
the Treaty, with responsibility for enforcing the rules resting
with the Commission.

29. On 21 September the US Congress passed
a substantial package of measures of Government assistance for
US carriers (the Air Transportation Safety and System Stabilization
Act, which became Public Law 107-42 on 22 September). Canada and
Japan have also announced support for their airlines.

30. Insurance: shortly after 11 September
the aviation insurance industry unilaterally gave airlines seven
days' notice that it would restrict cover for war-related third
party liability to $50 million. This compares to the $2 billion
cover held by BA before 11 September. Since lack of adequate cover
would invalidate aircraft leasing arrangements, and airlines'
Boards might not wish to risk operating without adequate insurance,
this raised the prospect of most if not all UK aircraft being
grounded from 24 September.

31. In response to this clear example of
market failure. HM Treasury, acting in collaboration with DTLR
and after consulting the airline and insurance industries, announced
on 21 September that it would provide an indemnity to fill the
gap between the cover airlines had purchased before 11 September
and the amount the insurance industry would now provide. The original
scheme ran for 30 days, and has since been renewed, with modifications,
for a further 30 days. Similar arrangements were made available
for airports and aviation service providers (including NATS plc),
which were likewise facing a withdrawal of cover. The scheme was
notified to the European Commission, which approved the arrangements
operating for the first 30 days as a permissible state aid.

32. The restriction of insurance cover applied
world-wide, and other countries with a significant aviation industry
have had to put guarantees in place. The UK was first to react
to these developments, and our proposals were endorsed in the
Conclusions of the ECOFIN Council on 21 September. Subsequently
many countries, both inside and outside the EU, have based their
guarantees on the UK scheme.

33. The Government, in common with its EU
partners, has stressed that its involvement in the aviation insurance
market is temporary and that it is looking to the insurance industry
to resume full cover as soon as possible. The EU has set a deadline
of 31 December 2001 for Government guarantees to end, but it remains
to be seen whether sufficient cover will be available from market
sources by that date to permit public authorities to disengage
altogether.

34. Other aid: recognising that the events
of 11 September would prompt call for further forms of government
support from EU airlines, many of which were facing difficult
economic conditions before that date, the Commission issued a
Communication for discussion at the Transport Council on 16 October.
In the Communication the Commission outlined how it intended to
interpret the Treaty rules in the present circumstances. It listed
a limited range of support measures (commonly referred to as the
"de Palacio package") which it would regard as compatible
with Article 87(2)(b) of the Treaty, which refers to aid "to
make good the damage caused by. . . exceptional occurrences".

35. In addition to the insurance guarantees
described in paragraphs 30 to 33 above, the Commission stated
it would look favourably upon:

(a) measures to compensate airlines for losses
directly attributable to the four day closure of American airspace;
and

(b) contributions by public authorities to
the costs of enhanced security measures following 11 September.

36. At the Transport Council on 16 October
a majority of Member States endorsed the Commission's position,
though a minority wanted to provide more substantial support for
their airlines. In the Conclusions of the meeting the reference
to "closure of American airspace" was widened to "closure
of certain parts of airspace". Any aid provided by a Member
State would remain subject to approval by the Commission.

37. UK airlines (though not the "no
frills" operators) have now formally requested the Government
to provide assistance in line with the "de Palacio package".
DTLR and HMT Ministers are currently considering the Government's
response to these requests. The requirement to make efficient
use of public money has to be considered against the wish not
to put UK airlines at a competitive disadvantage with their European
counterparts. On security costs the Government is conscious that
BA and many European carriers have already imposed ticket surcharges
to reflect increased insurance and security costs, and of the
long-standing principle that users should pay the full costs of
airline services.

38. Use-It-Or-Lose-It Rules: as an additional
measure of support for airlines, the Commission has indicated
it is prepared to consider flexibility in applying the "use-it-or-lose-it"
rules on slot allocation for the period up to the end of the Winter
2001-02 season. If agreed this would mean that a carrier which
rationalises its schedules to match the decline in demand would
do so without losing its historic slot rights for the winter 2002-03
season. The Government has supported flexibility (though for no
longer than the end of the Winter 2001-02 season). Whilst in normal
times we would welcome an increased turnover of slots at congested
airports and the greater opportunities this would offer to airlines
wishing to compete with incumbents, the Government recognises
that these are exceptional times. We do not wish carriers to be
incentivised to operate empty capacity in order to retain their
slots, thereby adding to the general economic difficulties.

39. US Government assistance: the US Government
has made available assistance to its airlines estimated to be
worth some $18 billion, comprising $5 billion in direct cash compensation
for the four day closure of US airspace and consequent loss of
revenue up till 31 December (as of 7 November just over $2.4 billion
of that had been paid out); the offer of up to $10 billion of
loan guarantees, albeit with tough conditions (only one airline
has so far applied); and $3 billion of assistance for enhanced
safety and security. The US Government argues that the cash paid
out so far is compensation, not subsidy, since the amount of money
individual airlines have received is far less than their documented
losses during the four day period.

40. Nevertheless, this sizeable package
arouses concerns that US airlines will have an unfair competitive
advantage on transatlantic routes compared to their EU competitors.
This could have a particularly damaging effect on certain UK carriers,
in particular BA and Virgin Atlantic, which depend heavily on
North Atlantic traffic. To meet these concerns the Transport Council
agreed a proposal that the Commission should seek to draw up a
"Code of Conduct" with the United states with the objective
of preventing unfair competition. The Commissioner has written
to the US Transportation Secretary about a Code and senior Commission
officials have made representations in Washington.

41. The Government recognises that in the
current depressed state of the aviation market it may be appropriate
for airlines to offer innovative fares to encourage market recovery.
However, there is a danger that the financial assistance provided
by the US Government might enable US airlines to cut UK/US fares
by a far greater margin than they would otherwise be able to do.
The Government is therefore monitoring tariffs filed by US airlines,
and, if it appears that such tariffs contravene those provisions
of the UK/US air services agreement ("Bermuda II") which
are designed to ensure fair competition, the Government will use
the consultation mechanisms available under the agreement to seek
redress from the US authorities.

42. Airline Rationalisation: the UK Government
supports the Commission in its firm line on state aid to airlines.
The financial challenges facing many EU carriers pre-dated 11
September, and it would be highly regrettable if further injections
of state aid, ostensibly justified by the events of 11 September,
were to impede the process of reorganisation and rationalisation
in the European industry which most commentators believe desirable.
Compared to the US the EU airline industry is fragmented, with
16 EEA airlines currently providing scheduled services in the
EEA/US market compared to only seven US carriers. The Government
fully endorses the view expressed by the Commission in a paper
to the April 2001 Transport Council that:

"Europe has a number of medium-sized carriers
that need new, external sources of investment and expertise, as
well as greater economies of scale. . . whilst Europe also has
a number of large, successful carriers which need to grow bigger
and which, moreover, have the financial and management resources
to do so. Consolidation within Europe is both desirable and necessary".

Ownership and Control Rules

43. One impediment to consolidation and
rationalisation of EU airlines is the operation in the airline
sector of ownership and control restrictions, which are part of
the traditional regulatory landscape of international aviation.
Stemming originally from concerns about national defence and security,
bolstered by considerations of national prestige and (more legitimately)
a wish to maintain safety oversight, these restrictions have had
the practical effect of requiring airlines exercising traffic
rights negotiated by a particular country to be majority owned
effectively controlled by nationals of that country. In addition
to removing or significantly reducing the incentives to efficiency
which can flow from the potential threat of takeover, such restrictions
inhibit airlines taking advantage of access to the global capital
market and the widest possible pool of management expertise. In
response to these restrictions airlines have been forced to form
alliances as a second-best alternative to cross-border mergers
or acquisitions.

44. Extra-EU Consolidation: in the EU the
creation of the aviation single market dismantled national ownership
and control restrictions for services within the Community, creating
the concept of a Community carrier. But Community legislation
replicated national ownership and control restrictions on a regional
scale, with Article 4(2) of EC Regulation 2407/92 requiring that:

". . . (an undertaking granted an operating
licence by a Member State) shall be owned and continue to be owned
directly or through majority ownership by Member States and/or
nationals of Member States. It shall at all times be effectively
controlled by such states or nationals".

45. The Government believes that EU airlines
should eventually be free to merge with or acquire non-EU airlines
as happens in other industries, consistent with competition rules
applied in other sectors. However, this would require an amendment
to Regulation 2407/92, which could only be agreed on a proposal
from the Commission and with the support of a qualified majority
in the Council of Ministers. Moreover, some of the EU's main aviation
partners, including the US, themselves maintain illiberal rules
on ownership and control of their own airlines, and the Community
needs to maintain negotiating leverage if it is to promote change
world-wide. The Government therefore recognises that the process
of normalisation towards a regulatory environment without nationality
restrictions on ownership (subject of course to safety and security
safeguards) will take time, and may have to be pursued on a reciprocal
basis.

46. Intra-EU Consolidation: traditional
ownership and control arrangements also impede intra-EU airline
consolidation. Most bilateral air service agreements include a
clause whereby each party reserves the right to withhold, revoke
or impose conditions on an operating licence issued to a designated
airline of the other party that is not substantially owned and
effectively controlled by the designating state or its nationals.
Whilst it is possible in most cases for a third country to take
a policy decision to accept airlines designated by bilateral partners
which are not substantially owned and effectively controlled by
the designating state or its nationals, and there are several
examples of where this has happened, there is no obligation to
do so, and a third country may choose for its own reasons to create
difficulties, or to try to extract a commercial advantage for
its own airlines. Where the continuing operation of bilateral
services might be put at risk there is clearly a potential obstacle
to airline consolidation.

47. The Government accepts that there must
be a link between the designating country and the airline designated,
in order to prevent the emergence of "flag of convenience"
airlines, and to maintain adequate oversight of security and safety.
In negotiating air service agreements the UK attempts to persuade
its bilateral partners that a test based on "principal place
of business" is preferable to traditional ownership and control
criteria. Where ownership and control criteria remain, the UK
has been flexible in not revoking traffic rights in response to
changes in ownership in third party airlines.

48. Restructuring of the airline industry
within Europe would be facilitated if more countries were prepared
to operate on a "principal place of business" criterion,
or failing that to interpret ownership and control clauses in
bilateral agreements more flexibly. The Government has recently
submitted papers on this issue to both the Triennial Assembly
of ICAO and to the October 2001 EU Transport Council and will
continue to press the point as opportunities arise.

We refer to the short inquiry which the Transport
Sub-Committee is undertaking into the immediate implications of
the current situation on the air transport industry. In particular
the implications of the terrorist attacks of 11 September 2001,
and the responses to those events by the industry, regulators
and governments.

In this regard the four signatories are submitting
this memorandum to the Sub-Committee for its consideration.

In this regard the signatories to this memorandum,
together with other ground handlers as detailed in Appendix 1,
have formed themselves into a coalition to address the urgent
and threatening situation facing aviation service providers in
the United Kingdom and elsewhere resulting from the abrupt cancellation
of their insurance protection for terrorism and war risk.

The members of this coalition serve domestic
and foreign airlines, general aviation and airport authorities
at all major airports throughout the United Kingdom and in some
40 countries world-wide. Each had its aviation liability insurance
cover for terrorism and war risk cancelled, usually on seven days
notice, promptly following the events of 11 September. In the
weeks since, it has been impossible to obtain adequate replacement
coverage. Relatively small amounts of coverage$50 million
for some firms and $150 million for othershave become available
at exorbitant premiums, in some cases in excess of 100 per cent
higher than the entire cost of their aviation liability insurance
held previously, of which terrorism risk was just one part.

This situation, and the way it has been addressed
by governments and regulators, has been inconsistent. In addition
to the problems being encountered as a result of the cost and
availability of war risk and terrorism insurance, competition
problems are now also becoming apparent. This is as a result of
the inequitable application of governmental indemnity programmes.
Both issues threaten the stability and strength of the independent
handling sector, and accordingly need to be addressed.

2. THE ROLEOFTHE
GROUND HANDLING
SECTOR

The ground handling industry makes civil aviation
in the UK, and globally, possible by providing important services
at airports to airlines, business aviation, and generally aviation.
A modern airline operation is an extraordinarily complex undertaking.
Passengers, baggage, air cargo and the aircraft are dependent
on a host of different products and services provided at commercial
service airports. A passenger will experience or observe may of
these services firsthand on a typical flight. Baggage checked
with a ticket agent or skycap is documented, sorted, combined,
and transported to the waiting aircraft. Cargo and mail, too,
is processed at the airport to be carried on airline flights.
Passengers continue through a screening checkpoint and may be
transported by wheelchair or cart to the gate. While waiting to
board, they may see a flurry of activity in and around the aircraft,
which may operate several different flights each day. Aircraft
cleaners and lavatory servicers prepare the cabin for new passengers,
catering crews replenish the aircraft galleys with food and beverages,
carts arrive with baggage and cargo to be loaded into the aircraft,
fuellers fill the aircraft from tank trucks or hydrants, and line
mechanics may be called in to perform minor repairs or maintenance.
Once loaded, the aircraft will be towed out of the gate and may
need to be de-iced.

Most of the people involved in these functions
are not airline or airport employeesthey work for aviation
service providers. At many airports outwith their home bases no
one airline usually has a sufficient presence to justify using
its own employees and facilities for all of these different activities.
Even the largest airlines may have only a few flights a day at
a particular airport, and it makes economic sense to contract
almost all necessary services from an aviation service provider.
Even airports contract out some of their own needs, such as ground
transportation and fuelling, to aviation service providers. Contract
services are generally the only way for smaller airlines to operate.

Aviation service providers also are essential
to the tens of thousands of small non-airline airplanes and helicopters
that operate in the UK and overseas. Such non-airline aircraft
carry more and more passengers and cargo each year, and all of
these aircraftwhether operated by an executive charter
fleet, a professional courier service, a corporate aviation fleet,
or an "air taxi", just to name a fewrely on aviation
service providers. Those same providers also serve aircraft used
not for transportation, but for activities like medical evaluation,
aerial photography, surveying, newsgathering, sightseeing and
traffic surveillance.

For these non-airline aircraft, aviation service
providers resemble the network of service stations, repair centres,
and rest areas that serve road traffic. One or more "fixed
base operators" or FBOs, stands ready at almost every airport
in the UK to refuel arriving aircraft, offer or arrange for aircraft
maintenance and repair, and assist pilots and passengers. The
smallest FBOs may be "family" operations offering no
more than a fuel pump, snacks, a telephone and information on
the airport and community. The largest FBOs offer different types
of fuel and other products, maintenance and repair services, pilot
lounges with weather and flight briefing facilities, food, ground
transportation and car rentals, and lounge and meeting facilities
for passengers.

3. IMPACTOF
LOSSOF
AVIATION INSURANCE
COVER

As described above, commercial aviation insurers
revoked War and Terrorism Risk coverage previously written for
aviation service providers (policy endorsement AVN52C), as a result
of the tragic events of 11 September 2001. The prompt recognition
and response of the UK Government to this crisis, through the
establishment of a Government sponsored insurance programme which
extended beyond airlines to encompass the wider aviation services
sector. This was an initiative widely welcomed amongst ground
handlers and has enabled our sector to maintain full service to
our airline customers in the UK.

However, our worldwide operations depend on
our being able adequately to manage risk and fulfil our licence
and contractual obligations in all countries in which we operate.

In addition to the UK some countries, most notably
in Canada, France, Netherlands, Belgium, Ireland and Hong Kong
also recognized the exposure and introduced government backed
insurance or indemnity programmes which included aviation service
providers. It had been our hope that other governments, particularly
those of the EU and US, would also recognize the interdependence
of world air transport operations and establish similar indemnity
programmes. Unfortunately, this has not proved to be the case
with the majority continuing to indemnify only their domestic
airlines, and some taking no steps at all.

We had also hoped that, within a short time,
our ability to source full commercial cover would return, in the
way it has for airlines. At the time of writing, this has not
proved to be the case, with only limited commercial cover currently
available for service providers, being a maximum of $50 million
under existing policies, and a further $100 million under a secondary
insurance programme. This cover is however only provided at significant
additional premium. Significant exclusions in most cases have
also been introduced for security screening functions. This is
a particular issue for the UK air cargo sector where a regulatory
obligation is imposed on UK cargo handlers to perform this function.

Ground handling functions are critical to the
efficient functioning of the civil air transportation system.
To ensure minimum disruption to the global air transport network
(including disruption to UK carriers' operations overseas), the
majority of ground handlers have maintained uninterrupted service
provision to airlines. Nevertheless, our industry has significant
and growing concerns as to the degree to which we are currently
under-insured, particularly in view of the significant risks now
existing within the aviation industry.

4. PRINCIPAL
CONCERNS

Following from the above our principal concerns
can be summarized as follows:

United Kingdom

The restoration of adequate commercial insurance
to the levels available prior to 11 September 2001 is unlikely
to be achieved by the aviation sector in the short term. The UK
Government-backed Troika insurance scheme, introduced on 24 September
2001, has enabled service providers operating at UK airports to
fill the gap between the level of commercial cover currently available
and that enjoyed prior to 11 September. This was a move widely
welcomed in the industry.

The Government has however stated that the Troika
scheme that currently operates on 30 day cycles, was only intended
as a short-term solution and would be withdrawn in due course.
We would like to emphasise that to do so until a satisfactory
and long-term commercial solution is available, will leave the
UK aviation service industry with inadequate War Risks cover.

International

We need to ensure that other governments fully
understand that the problems created by the cancellation of War
Risk cover extend beyond the airlines into the wider aviation
services sector. It is essential in our view, that, if operations
are to be fully maintained, suitable state solutions are available
within each country, along the lines of the UK model, until such
time as the commercial market can do the job.

In this regard we have:

(i) Written to EU Transport ministers urging
them to establish insurance schemes on a similar basis to the
UK model.

(ii) Engaged in consultation with the US
Department of Transport to ensure appropriate and adequate coverage
is provided in this key aviation market.

(iii) Engaged in a dialogue with the Foreign
and Commonwealth Office to ensure appropriate representations
are made to other governments in countries where UK aviation service
providers operate.

No satisfactory resolution has however been
achieved to date on any of the issues we have identified.

Commercial Insurance

Our ability to achieve and maintain adequate
commercial insurance on a global basis is essential to the restoration
and maintenance of effective air services. As an industry, we
are engaged in active dialogue, both with the airlines and the
insurance markets, to ensure our needs are fully recognized. We
believe our effectiveness and the chance of resolution will be
enhanced through the active involvement of government:

(i) Emphasizing to the commercial insurance
sector the consequences and difficulties of not fully covering
the wider air transport industry.

(ii) Considering whether it is in the public
interest for government to actively assist in developing and maintaining
a longer-term insurance programme for war and terrorism risk in
view of the continuing reluctance of the commercial market to
(fully) meet the threat.

In this regard we would add that the issue of
War Risk coverage has also now emerged as a more general issue
within the insurance market, with terrorism exclusions beginning
to appear in non-aviation policies.

Competition

In many airports around the world, including
the UK and EU, the independent ground handling sector faces significant
competition from ground handling organizations that are in the
ownership of airlines.

There are some signs of market distortions appearing
as a result of government responses. Airlines, some of which offer
ground handling and other services in competition to independent
handling companies have had their government scheme insurance
premiums waived or set at a lower rate. The commercial market
is also providing a greater amount of cover to airlines. Ground
handling operations of airlines are protected by their parentage
and in particular, the support of governments.

A situation has accordingly been created where
independent handlers such as Menzies, BBA, Servisair and Aviance
have been placed at significant competitive disadvantage. In the
countries of the EU where this has occurred, we believe this to
be a breach of competition rules and have made representations
to the EU Transport Commissioner to highlight this issue.

This is a significant ongoing issue for the
independent handling sector and is one which we intend to pursue
vigorously to protect the interests of our shareholders.

Security

The UK air cargo sector operates under a security
regime regulated by the Department of Transport, Local Government
and the Regions. This regime, which is amongst the most rigorous
in the world, imposes a series of security requirements upon cargo
handlers operating at the UK's airports. These security requirements
are not mirrored elsewhere in the EU, although we understand that
Ireland are looking to introduce a similar regime. Whilst we fully
support the UK's security requirements, the operation of this
regime imposes a significant cost, both financially and in time
taken to process cargo shipments, which competitor airports, in
particular those of Charles de Gaulle, Frankfurt and Schiphol
do not have. The effect of this was demonstrated in the immediate
aftermath of 11 September where substantial volumes of air cargo
shipments were lost by Heathrow, Gatwick, Stansted and Manchester
airports to those competitor airports, with the cargo then being
trucked to/from the UK.

In the longer terms we strongly believe that
unless a level playing field is created throughout the EU, the
UK will suffer a permanent loss of competitiveness in this area.
This will threaten the long-term health and growth of the UK air
cargo sector.

5. SUMMARYAND
FURTHER INFORMATION

The independent ground handling industry is
a significant, important and growing part of the aviation community,
and a major employer within it. It is an area of significant economic
interest to the UK with plc's such as Menzies, BBA, Servisair
and Aviance amongst the world's market leaders. The issue of insurance
and the competition and security issues it raises, represent key
factors which need addressing as a matter of urgency if the long-term
health of this sector is not to be put at risk.

Mr P S Smith,

Chief ExecutiveMenzies Aviation Group Plc

Mr A Wood,

Group Chief Financial OfficerBBA Group Plc

Mr J Willis,

Managing DirectorServisair plc

Mr P O'Boyle,

Managing DirectorAviance UK

November 2001

APPENDIX 1

COALITION OF AVIATION GROUND HANDLING SERVICE
PROVIDERS

Company

Principal office

Principal activities

Number of
countries
served

Number of
employees

Menzies Aviation
Group plc

United Kingdom

Passenger, ramp and cargo ground handling

25

9,500

Servisair plc

United Kingdom

Passenger, ramp and cargo ground handling

15

10,500

BBA Group plc

United Kingdom

Business aviation and fuelling services

7

11,000

Aviance UK (a subsidiary of the Go-Ahead
Group plc)

United Kingdom

Passenger, ramp and cargo ground handling

4

4,500

AviaPartner NV

Belgium

Passenger, ramp and cargo ground handling

7

6,000

Penauille Polyservices SA (parent company to Servisair and GlobeGround)